May 14, 2018

Dangote Sugar Refineries Plc: Margin expansion amidst slowed sales

Dangote Sugar Refineries Plc: Margin expansion amidst slowed sales


IN Q1’18 Dangote Sugar Refineries’ revenue declined 30.9% year-on-year (YoY) to  N41.1 billion, much lower than analysts’ projection of  N48.2 billion for the quarter (-17.2% deviation). But the company’s after tax earnings improved by 10.9% YoY to  N5.3 billion, although this also lagged analysts’  N6.8 billion estimate (29.7% deviation).

Industry view is that  the 30.9% YoY decline in revenues was largely due to lower prices during the quarter as the Management had previously hinted at expectations of lower prices in 2018. The company’s product prices were raised by about 43.5% on average in 2017 against 2016 levels, as the company tried to offset the impact of inflationary pressures and higher input costs. The revenue decline on a quarter-on-quarter (QoQ) basis was much milder at 0.6%.


Notwithstanding the slump in revenues, Q1’18 gross margin improved significantly by 11.80 percentage points (ppts) YoY to 25.0%, although this was slighter by 2.0ppts compared to the prior quarter. Informed sources attribute this to decline in overall material costs during the quarter, supported by lower raw sugar prices and the easing of the foreign exchange (FX) constraints that prevailed in the corresponding quarter of 2017.

The company incurred higher operating expenses during the quarter (N0.05 per unit of revenue, compared to  N0.03 per unit of revenue incurred in Q1’17), weighed by 44.0% YoY increase in selling and distribution expenses. Despite this, operating profit margin improved to 20.5% (Q1’17 – 9.8%), due, mainly to the impact of lower production costs.

Though  Q1’18 profit after taxes rose 10.9% YoY to  N5.3 billion, this, however was much lower (-60.2% QoQ) than the  N13.3 billion recorded in the prior quarter, which was also supported by FX revaluation gains of about  N3.9 billion.

Reacting to this result, analysts at Cardinal Stone Partners, a Lagos based investment house had this to say: “Dangote Sugar’s result reflects improving margins, thanks to the expected impact of lower input costs and FX stability. However, we highlight increasing operating expenses as a key downside risk to further margin expansion.

“We also note that the decline in revenues was much faster than our anticipation. Management has hinted at lower prices and we expect that this would create further opportunities for volume expansion. “Based on our last review, our target price for the counter is  N26.63 which is a 24.4% upside to current market price of  N21.40. Hence, we retain our  BUYrating.”

Analysts at Cordros Capital Limited, another Lagos based investment house appraising the performance of Dangote Sugar last week stated: “Dangote Sugar   published Q1-18 result showing EPS (Earnings Per Share) grew 12% YoY but declined 59% QoQ. The EPS growth came on the back of a higher gross margin compared to last year’s one-off low, masking a disappointing revenue performance.

“Should we adjust Q1-17 gross margin to Q1-18’s 25% (which is also the average achieved in 2017FY), we have EPS of -55% YoY and -60% QoQ.

“The volume outturn raises concern for 2018 revenue as a whole, given that the January-March quarter (and indeed, the first half) is seasonally strong for Dangote Sugar.

“On the 2017FY results call, management reiterated some of the volume concerns we had highlighted in previous notes – notably the activities of smugglers and the poor condition of the factory road – and added that the road to the North (accounting for 36% of revenue and where about the highest margin is derived) is equally deplorable, with negative impact on revenue.

“Also of concern is that the N13,056/tonne average selling price computed by management in the latest result is way below the N14,000/tonne price it said it was able to achieve during the last call held earlier this month. We have consequently revised our 2018E volume growth forecast to 5% (previously 9.5%) and cut average selling price estimate to N13,000/tonne – while acknowledging that the possibility of price further reducing has increased with the poor volume outturn in Q1’18.

“At 25%, the gross margin achieved in Q1’18 is about the 25.8% we estimated for 2018E. While noting that the downside risk to selling price, and consequently margin, has increased with this Q1’18 result, we should reiterate some tailwinds supporting our gross margin estimate as: (1) better energy mix, (2) stable and stronger exchange rate, (3) stable outlook of global raw sugar prices, and (4) positive mix from growing contribution of higher margin Savannah.

“Although OPEX (Operating Expenses) declined by 1.3% YoY in Q1-18, the ratio to revenue increased by 141 bps (basis points) YoY to 4.7%. With revenue now starting the year on an unimpressive note, we expect Dangote Sugar’s management must seek strategies to contain operating expenses, without which earnings risk falling significantly below last year’s.

“The group achieved 3.6% OPEX margin in 2017FY, and our estimate for 2018E is 3.7% (unchanged). Dangote Sugar’s operating expenses have traditionally been lower in Q2 and higher in Q4, compared to other quarters.

“We revise TP (Target Price) lower to N17.42 (previously N17.97), reflecting the downward revision of revenue estimate.  SELL  rating maintained.